Economy 101: Human Capital

Items such as equipment, tools, and machinery that are needed to produce goods and services are often referred to in economics as "physical capital." Similarly, "human capital" is the talent, skills, education, and experience of human beings that allow them to be productive in the creation of products and services. As our economy has evolved over time into one that is more service-oriented, human capital has increased in importance.

Investing in Human Capital

Each of us as individuals possesses human capital, but we differ in the amount and types. Human capital is an asset that can be accumulated and increased by investing in it. Acquiring education is one way to invest in human capital that, as with any investment, has financial returns. For example, in 2006 the median annual income earned by a high school-educated male between the ages of 25 and 34 working full-time was $30,000. At the same time, the median income of a man of the same age with a bachelor's degree or higher was $50,000. The difference, $20,000, is the average return that year on having invested in a college education.*

Multiple Returns on Investment

Of course, financial return is not the only payoff one obtains from investment in education. There is also the personal satisfaction and enjoyment presumably derived from the opportunities that education presents - such as a greater ability to choose one's field of employment and engage in work that one finds personally fulfilling. These intangible rewards for investing in human capital can be equally as enriching, if not more so.

Human capital is of course not just about education. It is all of the attributes - skill, expertise, talent, knowledge, even motivation and positive attitude - embodied in an individual that make him or her a productive and valuable economic resource. Corporations invest in their human capital when they provide training to their employees, and employees invest in themselves simply by showing up at work and improving upon their skills and experience.

Positive Externalities

Individuals who invest in their own human capital are not the only ones who reap the benefits of this choice. Society as a whole generally benefits from an individual's investment in self improvement in that the increase in the overall education of a nation's citizens reduces poverty and crime and increases global marketplace competitiveness. These positive side effects are externalities to such an investment.